Prepare the journal entries for both the lessee and the lessor for 2012 to reflect the…

(Sale-Leaseback) Assume that on January 1, 2012, Elmer’s Restaurants sells a computer system to Liquidity Finance Co. for $510,000 and immediately leases the computer system back. The relevant information is as follows.

1. The computer was carried on Elmer’s books at a value of $450,000.

2. The term of the no cancelable lease is 10 years; title will transfer to Elmer.

3. The lease agreement requires equal rental payments of $83,000.11 at the end of each year.

4. The incremental borrowing rate for Elmer is 12%. Elmer is aware that Liquidity Finance Co. set the annual rental to ensure a rate of return of 10%.

5. The computer has a fair value of $680,000 on January 1, 2012, and an estimated economic life of 10 years.

6. Elmer pays executory costs of $9,000 per year.

Instructions

Prepare the journal entries for both the lessee and the lessor for 2012 to reflect the sale-leaseback agreement. No uncertainties exist, and collectibility is reasonably certain.

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